Risk and Market Segmentation in Financial Intermediaries' Returns
AbstractThis study examines both the quantity and price of risk exposure for different segments of financial intermediaries in order to determine whether market segmentation exists in the financial services industry in the United States. We distinguish between depository institutions, securities firms, insurance companies, mutual funds, and other financial firms using each company s SIC code. We find evidence of market segmentation in both market risk levels and market risk premiums. The results provide little evidence of interest rate risk exposure across all types of financial intermediaries, suggesting the prevalence of hedging programs using interest rate derivatives. However, the market prices interest rate risk exposure differentially by type of financial intermediary. We find that as a market segment, insurance companies were exposed to more interest rate risk particularly in the period late 1980 s to early 1990 s. The interest rate risk premium for banks was among the highest of all financial intermediaries. Overall, we find that securities firms, as a group, have the most market risk exposure, followed in order of descending market beta, by banks, other financial firms, insurance companies, and mutual funds, although the order is reversed when examining the market risk premium. Indeed, we find support for an inverse relationship between the quantity and price for market risk, but not for interest rate risk. When we investigate the impact of two regulatory policy changes, we find that (1) the shift in the conduct of monetary policy towards targeting of monetary aggregates induced banks to take on more market risk, probably due to a decline in their charter value; (2) bank market risk-taking increased further with the introduction of riskbased capital requirements which further reduce charter value for banks; and (3) insurance companies are subject to the highest interest rate risk premiums during the 1988-1994 subperiod, following by commercial banks, probably due t
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Springer in its journal Journal of Financial Services Research.
Volume (Year): 12 (1997)
Issue (Month): 2 (October)
Contact details of provider:
Web page: http://www.springerlink.com/link.asp?id=102934
Other versions of this item:
- Linda Allen & Julapa Jagtiani, 1996. "Risk and Market Segmentation in Financial Intermediaries’ Returns," Center for Financial Institutions Working Papers 96-36, Wharton School Center for Financial Institutions, University of Pennsylvania.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mark Flannery & Christopher James, .
"Market Evidence on the Effective Maturity of Bank Assets and Liabilities,"
Rodney L. White Center for Financial Research Working Papers
05-83, Wharton School Rodney L. White Center for Financial Research.
- Flannery, Mark J & James, Christopher M, 1984. "Market Evidence on the Effective Maturity of Bank Assets and Liabilities," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 435-45, November.
- Mark Flannery & Christopher James, . "Market Evidence on the Effective Maturity of Bank Assets and Liabilities," Rodney L. White Center for Financial Research Working Papers 5-83, Wharton School Rodney L. White Center for Financial Research.
- Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
- Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
- Jeff Madura & Emilio R. Zarruk, 1995. "Bank Exposure To Interest Rate Risk: A Global Perspective," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 18(1), pages 1-13, 03.
- Amsler, Christine E. & Schmidt, Peter, 1985. "A Monte Carlo investigation of the accuracy of multivariate CAPM tests," Journal of Financial Economics, Elsevier, vol. 14(3), pages 359-375, September.
- Flannery, Mark J & James, Christopher M, 1984. " The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions," Journal of Finance, American Finance Association, vol. 39(4), pages 1141-53, September.
- Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
- Allen, Linda & Jagtiani, Julapa & Landskroner, Yoram, 1996. "Interest rate risk subsidization in international capital standards," Journal of Economics and Business, Elsevier, vol. 48(3), pages 251-267, August.
- Campbell R. Harvey, 1994.
"Predictable Risk and Returns in Emerging Markets,"
NBER Working Papers
4621, National Bureau of Economic Research, Inc.
- Boyd, John H. & Graham, Stanley L. & Hewitt, R. Shawn, 1993. "Bank holding company mergers with nonbank financial firms: Effects on the risk of failure," Journal of Banking & Finance, Elsevier, vol. 17(1), pages 43-63, February.
- Sweeney, Richard J & Warga, Arthur D, 1986. " The Pricing of Interest-Rate Risk: Evidence from the Stock Market," Journal of Finance, American Finance Association, vol. 41(2), pages 393-410, June.
- Amar Gande & Manju Puri & Anthony Saunders & Ingo Walter, 1995. "Bank underwriting of debt securities: modern evidence," Proceedings 481, Federal Reserve Bank of Chicago.
- Jagtiani, Julapa & Saunders, Anthony & Udell, Gregory, 1995. "The effect of bank capital requirements on bank off-balance sheet financial innovations," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 647-658, June.
- Yourougou, Pierre, 1990. "Interest-rate risk and the pricing of depository financial intermediary common stock : Empirical evidence," Journal of Banking & Finance, Elsevier, vol. 14(4), pages 803-820, October.
- Ferson, Wayne E & Harvey, Campbell R, 1993. "The Risk and Predictability of International Equity Returns," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 527-66.
- Puri, Manju, 1996. "Commercial banks in investment banking Conflict of interest or certification role?," Journal of Financial Economics, Elsevier, vol. 40(3), pages 373-401, March.
- Sung C. Bae, 1990. "Interest Rate Changes And Common Stock Returns Of Financial Institutions: Revisited," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(1), pages 71-79, 03.
- Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 1-33.
- Pariyada Sukcharoensin, 2013. "Time-Varying Market, Interest Rate and Exchange Rate Risks of Thai Commercial Banks," Asian Academy of Management Journal of Accounting and Finance, Penerbit Universiti Sains Malaysia, vol. 9(1), pages 25-45.
- George Alessandria & Horag Choi, 2007.
"Do Sunk Costs of Exporting Matter for Net Export Dynamics?,"
The Quarterly Journal of Economics,
MIT Press, vol. 122(1), pages 289-336, 02.
- George Alessandria & Horag Choi, 2005. "Do sunk costs of exporting matter for net export dynamics?," Working Papers 05-20, Federal Reserve Bank of Philadelphia.
- Victoria Geyfman, 2005. "Risk-adjusted performance measures at bank holding companies with section 20 subsidiaries," Working Papers 05-26, Federal Reserve Bank of Philadelphia.
- Victoria Geyfman, 2005. "Banks in the securities business: market-based risk implications of section 20 subsidiaries," Working Papers 05-17, Federal Reserve Bank of Philadelphia.
- Papadamou, Stephanos & Siriopoulos, Costas, 2014. "Interest rate risk and the creation of the Monetary Policy Committee: Evidence from banks’ and life insurance companies’ stocks in the UK," Journal of Economics and Business, Elsevier, vol. 71(C), pages 45-67.
- Jongmoo Choi & Elyas Elyasiani, 1997. "Derivative Exposure and the Interest Rate and Exchange Rate Risks of U.S. Banks," Journal of Financial Services Research, Springer, vol. 12(2), pages 267-286, October.
- Elyasiani, Elyas & Mansur, Iqbal & Pagano, Michael S., 2007. "Convergence and risk-return linkages across financial service firms," Journal of Banking & Finance, Elsevier, vol. 31(4), pages 1167-1190, April.
- Chakraborty, Suparna & Allen, Linda, 2007. "Revisiting the Level Playing Field: International Lending Responses to Divergences in Japanese Bank Capital Regulations from the Basel Accord," MPRA Paper 1805, University Library of Munich, Germany.
- Muhammed Monjurul Quadir, 2012. "The Effect of Macroeconomic Variables On Stock Returns on Dhaka Stock Exchange," International Journal of Economics and Financial Issues, Econjournals, vol. 2(4), pages 480-487.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F. Baum).
If references are entirely missing, you can add them using this form.